Examining bargaining power in the distribution channel under possible price pass-through behaviors of retailers

Abstract

We investigate the determinants of relative power within a distribution channel by incorporating the price pass-through behavior of a retailer into Nash bargaining between a retailer and a manufacturer. We assume manufacturers can observe such behavior as well as the retail price itself. We first derive the retail margins from a retailer maximizing its profit, assuming that the retailer anticipates the manufacturer's profit-maximizing response to the price pass-through behavior. The manufacturer margins are derived from the generalized Nash bargaining with the retailer, where the parties negotiate the wholesale price. Finally, we identify conditions under which the bargaining power parameter is well-defined based on the values of retailer and manufacturer margins and the parameter describing the degree of price pass-through. A toy Bayesian estimation example using daily scanner panel data for canned tuna at a single retail chain in western Tokyo, Japan, demonstrates the applicability of our model. We contrast this result with those obtained under the framework proposed by Draganska et al. (2010) without the price pass-through behavior and the retail price observability by manufacturers.